Acom Co., Ltd. (8572) Earnings Call Transcript & Summary

I'd like to extend my heartfelt appreciation to all of you for your kind support to and understanding of the company and attending the presentation and financial results out of your business schedules. I will go over item #1 and give you a summary of our financial results for fiscal year ended March 2024. Later, Mr. Okamoto, Chief PR and IR Officer, will go over item #2 and give you supplementary information on interest repayment, provision for bad debt and financial expenses. Please go to Page 4. Firstly, I will give you an overview of consolidated results. Consolidated receivables shown on the right, grew 7.5% to JPY 2.531 trillion. We achieved the receivables target of JPY 2.5 trillion. In the midterm business plan ending fiscal year March 2025, 1 year ahead of schedule. Looking ahead, receivables by business line. Receivables grew 9.5% to JPY 11.3 billion in the loan and credit card business, grew 5.4% to JPY 1.2782 trillion in the guarantee business and by 10.8% to JPY 243.2 billion in the international financial business. Two factors are behind the growth. Firstly, the initiatives we put in place to effectively capture customers' loan demand, helped new customer acquisition and additional borrowing among existing customers, both in the loan and credit card business and the guaranteed business in Japan. Secondly, the weak yen helped to boost receivables in the international business. Please move on to Page 5. Consolidated operating revenue shown on the left, grew 7.6% to JPY 294.7 billion, thanks mainly to receivables growth. Looking at operating revenue by business segment. Operating revenue in the loan and credit card business increased by 7.5% to JPY 156 billion. Operating revenue in the guarantee business benefited from receivables growth and a regular fee review and grew 6.8% to JPY 70.7 billion. Thanks to receivables growth of EASY BUY in Thailand and the weak yen, operating revenue in the overseas financial business increased 9.5% to JPY 61.8 billion. Operating profit shown on the right, dropped by 1.1% to JPY 86.3 billion. Looking at operating profit by business line. Operating profit in the guarantee business came down. With the recovery of new customer acquisition, the proportion of newer borrowers increased. It will take some time before transactions with these customers will become more stable. In the meantime, provision for bad debt rises temporarily. While the same goes for the loan business operating profit grew by 2.7% with operating revenue growth of 7.5% because of the size of its receivables and lending rates. Please turn to Page 6. Next, I would like to touch on dividends. As shown at the top, our basic capital policy is to maintain and improve financial health and offer a good shareholder return. Our dividend policy is to improve shareholder return, supported by high profitability and appropriate shareholder equity. As shown on the left, we target around 10% return on equity, equity to asset of around 25% and a dividend payout ratio of about 35% in fiscal year, ending March 2025 in the current midterm business plan. Turning to the right-hand side of the page, please find where those numbers were at the end of March 2024. As shown at the top, return on equity, which is a metric for profitability stood at 8.8%. As shown in the center equity to assets, which stood at 23.3% is on track to get to the target of 25%. As for shareholder return, shown at the bottom, despite reduced profit, we have kept JPY 6 per share dividend for the second half with an annual dividend of JPY 12, which works out to a dividend payout ratio of 35.4%. Strong receivables growth and new customer acquisition are behind our decision. I'll come back to dividend forecast for fiscal year ending March 2025 later. Please go to Page 7. Now let's review how each business performed. Firstly, taking -- talking of an operating environment in the loan and credit card business with COVID-19 recategorized as a category 5 infectious disease and normalization of social and economic activities helped by various policies, a moderate economic recovery continues. While increasing tensions in the international situation, monetary tightening due to high inflation and other factors could dampen the economy, the domestic economy seems more vibrant than pre-pandemic. Loan demand is strong in the nonbank market as those who do not take card loans before have become customers. Turning to the right-hand side of the page. With strong loan demand have invested in advertisements efficiently and gained new customers while keeping per customer acquisition cost low. I'll come back to the number of new customers and advertising promotional spend or AMP spend later in my presentation. On top of that, we have revisited credit screening among existing borrowers by trying aggressively to get their income certificates, which helped to grow receivables more than expected. Please move on to Page 8. Please find the evolution of loan and credit card receivables on this page. Loan receivables for fiscal year ended March 2024, illustrated by the second bar from the right, increased to JPY 879 billion, exceeding the pre-pandemic level of March 2020. Combined receivables of loan and credit card operations showed very strong growth with JPY 1,001.3 trillion, topping the JPY 1 trillion mark. Please turn to Page 9 for the number of new accounts. Post pandemic, as with receivables, the number of new accounts showed a strong trend. In fact, we revised up our forecast of 400,000 from the initial target of 300,000 in November. The actual number of new customers was even higher than the revised target with a 39% increase to 430,000. The number of new accounts topped 400,000 for the first time in 21 years since fiscal year ended March 2003. We forecast a number of new accounts will come down year-on-year to 375,000 for fiscal year ending March 2025. We expect loan demand will remain strong to the first quarter and gradually come back to its pre-pandemic level in the second quarter and beyond. Please go to Page 10 for advertising and promotional spend or A&P spends. Turning to the left-hand side of the page, with strong new customer acquisition, A&P spend totaled JPY 19.5 billion in fiscal year ended March 2024, while it increased JPY 1.7 billion year-on-year from JPY 17.7 billion, it was around JPY 300 million less than the target of JPY 19.8 billion as acquisition cost per account trended down with good control in place as is illustrated by the solid line. Please find a quarterly trend of A&P spend and per customer acquisition cost. Acquisition costs, which remained low throughout the year trended down as we continue to review online ads and advertising agencies cooperated and helped us run ads at a low cost. On the other hand, with a drop in the number of new customers, in the market, acquisition cost per new account could gradually rise as pent-up demand becomes more stable. We'll continue to monitor our future trends. Please turn to Page 11. Next, I'll touch on bad debt expenses in the loan and credit card business. Bad debt expenses during the fiscal year under review increased JPY 6.1 billion year-on-year to JPY 35.4 billion from JPY 29.2 billion. They were higher than the pandemic level and JPY 500 million more than the original target of JPY 34.9 billion. This is mainly because with greater than expected new customer acquisition, the proportion of newer borrowers who are more likely to default increased. We forecast that the expenses will increase JPY 4.6 billion year-on-year to JPY 40.1 billion for fiscal year ending March 2025. As we assume default among the 430,000 borrowers we gained in fiscal year ended March 2024. We, however, expect bad debt expenses will become more stable in fiscal year ending March 2026 and beyond. This is because the proportion of newer borrowers who are more likely to default will gradually decline. As we anticipate the number of new accounts will drop year-on-year to 375,000 in fiscal year ending March 2025. We consider an increase in provision for bad debt associated with growth in new customers to the advanced investment needed for future revenue growth. Although it increases temporary profit will grow in the long run. Please move on to Page 12. Next, I would love to touch on request for interest repayment. Please find the evolution request every year on the left. The number of requires in fiscal year ended March 2024 show on the very right, declined 23.9% to 14,000. The rate of decrease is faster than around 15%, which we initially expected. The graph on the right shows the evolution of requests every quarter. You can see the rate of decline accelerate over time. We expect the number of requests to further come down. Please turn to Page 13 for revenue and profits of the loan and credit card business. Operating revenue shown on the left, increased 7.5% to JPY 156 billion, exceeding the pre-pandemic level of March 2020. Operating profit shown on the right, grew 2.7% to JPY 41.7 billion. Please move on to Page 14. We have made good progress in preparation for the launch of embedded finance business in our effort to further expand the loan and credit card business. We founded Genie in April 2022 to offer new financial services through partnership with companies which enjoy support from their end users. As I told you during the last results presentation, we now have a new system vendor with whom we have been working on system development since June. With the completion system development scheduled before summer, we plan to launch operations sometime during the first half. Once we decide to start operation, we will produce a press release to let you know. We are confident that embedded finance, which leverages ACOM's credit screening and collection expertise is valuable service. We will do our utmost to prepare for the launch of the business. Please go to Page 15 for the guarantee business. Regarding expansion of guarantee partnership with financial institutions shown on the left, our consolidated subsidiary, MU Credit Guarantee forged partnership with Minna no Ginko in February, thanks to its steady effort to negotiate with a new partner. ACOM on the other hand, concluded a business alliance agreement with AEON Bank earlier this month. With the start of guarantee partnership planned next fiscal year, we will move ahead with the coordination and system development so that we can start operation as soon as we can. We are in negotiation with other financial institutions and nonfinancial businesses for potential guarantee partnership. Once we finalize these negotiations, we will get back to you with a news release. Consolidated guaranteed receivables, shown on the right to JPY 1.2782 trillion. Thanks to enhanced collaboration with existing partners, exceeding the pre-pandemic level of March 2020 and beating the full year target. Please turn to Page 16 for revenue and profits of the guarantee business. Operating revenue shown on the left, increased 6.8% to JPY 70.7 billion. Two factors are behind the revenue growth. Steady receivables growth and an increase in guarantee fees, thanks to a regular fee review. Operating profit shown on the right, dropped 11.6% to JPY 22.6 billion. As in the loan and credit card business, with strong new customer acquisition, the proportion of newer borrowers increased, which resulted in an increase in provision for bad debt. Please go to Page 17 for International Financial Operations. Turning to the left-hand side of the page, the Thai economy has continued to post moderate growth, helped by a recovery of inbound demand and personal consumption, while its growth rate has slowed down due to global economic slowdown. The deregulatory measures, which the Thai Central Bank had introduced to help borrowers hit by the pandemic ended at the end of 2022. As is illustrated by the line graph, the NPL ratio in the nonbank market has gone up recently. We believe this is caused by an increase in the number of borrowers whose debt grew following the introduction of the deregulatory measures. While the increase in EASY BUY's NPL ratio has remained relatively low, we need to closely monitor its potential impact. Moreover, the Thai Central Bank announced the introduction of our responsible lending regulation, which is aimed at improving household debt. This could impact EASY BUY's future loan applications. Please find EASY BUY's receivables on the right. While it was adversely impacted by the end of these regulatory measures, through its effort to gain new customers and sales activities, EASY BUY did better than expected by growing its receivables 2% to THB 58. 1 billion. Please turn to Page 18 for EASY BUY's revenue and profits. Operating revenue shown on the left, increased 1.4% to THB 14.8 billion, thanks to receivables growth. Operating profit, on the other hand, grew 4.4% to THB 5.8 billion, as shown on the right. We need to closely monitor how its NPL ratio will trend, as I mentioned when I was on the topic of an external environment. Please go to Page 19 for international operations in other countries. Turning to the left-hand side of the page, with the recovery of inbound demand, the Philippine economy is likely to continue to post solid growth. We opened a new sales outlet in the Manila Metropolitan area in January, with more community-based sales activities, which are not possible with a traditional branch format. We try to drive efficiency gains in sales and collection activities to further build ACF's brand recognition. Turning to the right side of the page. ACOM (M) in Malaysia started its operation last September. Under local role, we had to have customers come to our office for loan contracts. After receiving a license for online transactions from a local regulator in January, however, we launched online services in March. This allows customers to complete a contracting process online without visiting our physical outlet. Going forward, we will build a framework which will enable us to deliver customer-friendly services faster than local banks and peers. Lastly, we continue to do research on other countries as we aim to start business in one more country during the current midterm business plan. Once we decide to enter a new market, we will get back to you. Please turn to Page 20. It is our staff who run all of the businesses I have talked about so far, with sustainable growth of our group. We need to respect abilities, ideas and values of our diverse talent and develop the kind of talent who is capable of putting a corporate philosophy into practice. At the same time, we need to build a rewarding and worker-friendly environment. We, in fact, have various measures in place to create a rewarding workplace. We have visual sharing programs shown on the left to help build a more rewarding environment. We value and promote dialogues among executives general managers and staff where they discuss actions to put our corporate vision into practice. We plan to continue this program to help each and every one of our employees relate to it and see it as their own. Turning to wages. We raised base salaries in April again following pay increases in October 2022. This actually amounts to a pay increase of about 5.2%, including a regular pay hike. In an effort to build a worker-friendly environment, we introduced a new program where employees who have come back after childcare leave receive benefits and can choose shorter several work hours. We'll build a more worker-friendly environment to accommodate diverse views on career building. These initiatives have helped us receive the highest ever engagement score in an employee survey as is shown on the right. Please turn to Page 21. Our HR initiatives have earned us good external ratings. In the area of hiring new graduates at the top, we rank #2 in our industry in a joint survey by My Navi and Nikkei in popularity of companies ranking among new university graduates in 2025. We in higher ranking than Rakuten Card, ORIX Group and Sumitomo Mitsui Card. In the area of employee engagement at the bottom left, we have ranked among the top 10 companies in best Motivation Company award in the large company category for 5 consecutive years. And in welfare at the top right, we have received the highest rating under a welfare award and certification system, Hataraku Yell, for 3 consecutive years. We are the only company, which is one of the highest rating for 3 consecutive years. In health and productivity management at the bottom, we have won the excellent Health Management Corporation recognition for 3 consecutive years. Please turn to Page 22. On the [indiscernible] rating front, R&I has upgraded us by 3 notches in the last 2 years with AA- rating, we are on a par with Dentsu, Oriental Land and JCB. We believe it is a competitive advantage. Our international operations and our partnership with MUFG that has helped us receive the very high rating. With rising interest rates, we will fully leverage the higher rating to control our financial expenses. Lastly, please turn to Page 23 for full year guidance for fiscal year ending March 2025. Turning to receivables shown on the left. We are targeting 6.6% growth of consolidated receivables to JPY 2.6979 trillion. By business line, we target 7.1% growth to JPY 1.0725 trillion for the loan and credit card business and 7.2% growth to JPY 1.3701 trillion for the guaranteed business. We will promote more aggressive sales activities of our partners. We forecast 1.2% growth to JPY 246.1 billion for the international financial business. While we assume an expected impact from various regulations in Thailand will make strong loan growth difficult. We nonetheless plan to maintain loan growth. Turning to the right-hand side of the page. We forecast a number of new accounts will decrease by 12.9% to $375,000 in the loan and credit card business. While loan demand remains strong, we assume it will gradually go back to its pre-pandemic level. With an expected drop in the number of new accounts, we forecast A&P spend to come down by 11.5% to JPY 17.3 billion. Please go to Page 24. Next, turning to operating revenue on the left. We forecast 6.4% growth of consolidated operating revenue to JPY 330.5 billion, driven mainly by receivables growth. By business segment, we forecast 8% growth to JPY 168.5 billion for the loan and credit card business, 8.5% growth to JPY 76.8 billion for the guaranteed business and 0.3% growth to JPY 62.1 billion for the offshore financial business. As for operating profit, we forecast 0.9% growth to JPY 87.1 billion and 4.7% growth to JPY 55.6 billion of profit attributable to shareholders of the parents. Last but not least, as for dividends, shown on the right. Given that we expect revenue and profit growth and that we are on track to achieve the target equity to asset of 25%. We plan to pay JPY 7 for each half or JPY 14 annually, JPY 2 more than last fiscal year. This works -- works up to a dividend payout ratio of 39.4%. We will do our utmost to achieve stable growth of the 3 core businesses. I would like to conclude my presentation by asking for your continued support and guidance to our group. Thank you very much.

I'm going to spend the next 10 minutes or so to go over interest repayment, provision for bad debt and financial expenses for supplementary information. Please go to Page 39 for claims for interest repayment. The number of claims for interest payment decreased by 23.9% to 14,000. We initially projected the number of claims to come down by 15%. The current rate of decline is faster than we expected. We assume the number of requests would drop by around 25% for fiscal year ending March 2025. We expect that with statute limitations, request for interest repayment will continue to decrease. Claims for interest repayment, however, are susceptible to changes in external environment, such as ad activities of some low firms will closely monitor their trends. Please turn to Page 40 for loss on interest repayments. The total drawdown of reserve for loss on interest repayment shown on the right, dropped 3.9% to JPY 27.3 billion. We initially projected a decrease of about 10%. The current rate of decline is slower than we expected. The proportion of cases which end up in court increased, which resulted in a greater amount of repayment per case. While the average size of repayment has gone up, you can rest assured that the number of claims being processed is steadily trending downward. We expect the total drawdown for fiscal year March 2025 to decrease around 15% as we assumed at the end of March 2022, when we topped up the reserve. Since claims for interest repayment are susceptible to changes in our external environment, we'll continue to examine the difference between our initial projection for reserve balance and actual balance every quarter to see if we have a reasonable and sufficient level of reserve sitting on the balance sheet. Please move on to Page 41 for provision for bad debt. Consolidated provision for bad debt shown on the left, increased 21.7% to JPY 97.9 billion, due mainly to an increase at ACOM. I'll come back to the factors behind the increase later. Provision for bad debt at EASY BUY shown on the right, decreased by 3.4% on a local currency basis. With the pandemic subsiding, the company refined its provisioning part model in the second quarter to try to reflect our recent trends and future projections which resulted in reversal of provision. Provision for bad debt in yen terms, on the other hand, increased JPY 700 million to JPY 19.1 billion. The weaker yen against the Thai Baht is behind the increase. Please go to Page 42. Provision for bad debt on a nonconsolidated basis are comp shown on the left, increased by JPY 14.4 billion to JPY 70.9 billion. While bad debt expenses increased JPY 10.6 billion, a change in allowance for doubtful accounts was an increase of JPY 2.2 billion and a change in provision for loss on guarantees was an increase of JPY 1.5 billion. Now I'd like to explain what's behind the increase in bad debt expenses and an increase in change in our loans for doubtful accounts. As President Kinoshita explained earlier, 2 factors are responsible for the increase in bad debt expenses. Firstly, receivables grew both in the loan and credit card business and the guaranteed business. Secondly, with the new customer acquisitions stronger than initially expected, the proportion of newer borrowers who are more likely to default increased. Next, I will touch on a change in allowance for doubtful accounts. With the growth of receivables and less commitment line left, resulting from additional borrowing resulting in a higher reserve ratio allowance for doubtful accounts increased by JPY 6.6 billion year-on-year from JPY 61.7 billion to JPY 68.3 billion in fiscal year ended March 2024. Allowance for doubtful accounts in fiscal year ended March 2023, on the other hand, increased JPY 4.4 billion year-on-year from JPY 57.3 billion. Growth of receivables is a major factor behind the increase. This resulted in a JPY 2.2 billion increase year-on-year in change in allowance for doubtful accounts. Please turn to Page 43. Lastly, I would like to touch on financial expenses. Consolidated financial expenses shown on the left, increased by 22.8% to JPY 4.9 billion due to an increase in financial expenses at ACOM and EASY BUY. Nonconsolidated financial expenses at ACOM are shown on the right, increased 19.5% to JPY 3 billion. Two factors are responsible for the increase. Firstly, with the growth of receivables, outstanding debt increased. Secondly, given unstable market rates, we put on hold debt issuance the year before. We, however, issued debt and raised a total of JPY 65 billion during the fiscal year under review, which resulted in some debt issuance cost. Next, the main factor behind the increase in EASY BUY's financial expenses is higher funding costs with higher market rates. Please go to Page 44. Outstanding debt shown on the left, increased by JPY 83.2 billion to JPY 588. 4 billion, with average borrowing costs going up by 4 basis points to 0.56% as is illustrated by the line graph. The pie chart on the right shows funding sources and their proportions. The split between direct and indirect funding is 28% and 72% with funding from MU Bank, representing 36.5%. While there is concern about rising interest rates, given that 82.5% of our total debt is at fixed rates, and that 94.9% is long term, the magnitude of an impact from higher rates will be immaterial for some time to come. For your reference, Page 46 and following pages show the trend of the size of the personal card market, the trend of interest repayment and the midterm management plan. This will do for supplementary information on financial results for fiscal year ended March 2024. I would like to conclude my presentation by asking for your continued support and guidance to our group. Thank you very much.